Single Family Offices: the art of effective wealth management

Single Family Offices:

the art of effective wealth management1

Heinrich Liechtenstein

IESE Business School, University of Navarra Spain

Raphael Amit

The Wharton School, University of Pennsylvania

M. Julia Prats

IESE Business School, University of Navarra Spain

Todd Millay

Executive Director, Wharton Global Family Alliance

Abstract

Single family offices (SFOs) are professional organizations dedicated to managing family

wealth and family matters. Despite the substantial and growing importance of SFOs, however,

there is little systematic knowledge of how they are structured and what services they deliver to

families. Because SFOs typically focus on the private affairs of one family, there is little

comparative information available about the range of SFO types and the key differentiators

among the variety of SFOs existing today. This chapter begins to fill this gap by presenting the

results of an international pilot study based on over 40 personal interviews and 138 follow-up

surveys with the heads of SFOs managing US $100m or more in investable assets across the

United States, Europe and Asia. The project reveals several learning points on how to run an

SFO effectively across continents and generations.

We are grateful to Josep Tapies for inviting us to contribute a chapter to this book, which is being published to

celebrate the 50th Anniversary of IESE. We would like to thank the team at IESE's Center for Family-Owned

Business and Entrepreneurship (CEFIE), particularly Netta Etzion, and the Wharton Global Family Alliance

(WGFA) team, particularly Sagit Stern, for their support during the project. Results presented in this chapter are

based on an ongoing research project on Wealth and Family carried out under the auspices of the Wharton Global

Family Alliance. We appreciate the involvement of the other partners in the WGFA, SDA Bocconi, Singapore

Management University, and CCC Alliance. We would like to thank our collaborators from the following

European organizations: Institute for Family Business ¨C IFB (UK), Association Fran?aise du Family Office ¨C

AFFO (France), Campden (International, with HQ in the UK), Family Office Circle run by Aeris Capital

(Germany), Instituto de la Empresa Familiar ¨C IEF (Spain), Le Club B (Switzerland), WHU ¨C Otto Beisheim

School of Management (Germany). We thank our collaborators Citi and Mellon Financial for their support of our

research.

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Single family offices (SFOs), which are professional organizations dedicated to managing

family wealth and family matters, represent the leading edge of a broad trend in substantial

personal wealth accumulation. The worldwide concentration of wealth in the hands of relatively few

is well-documented. As the rich grow even richer, and particularly as fortunes filter down through

generations, wealth management becomes ever more complex. It is in this context that SFOs¡ª

dedicated to the service of one multi-millionaire or billionaire family¡ªhave evolved.

The combination of substantial resources and individual decision making can result in a

great deal of creativity. Indeed, large private investors have been at the forefront of the development

of new asset classes and investment vehicles such as hedge funds, private equity, and venture

capital. Given the scale of family offices, even slight improvements in practices can yield substantial

benefits, particularly when these incremental enhancements are compounded over long periods of

time. Most family offices are designed with a multi-generational perspective and a core purpose of

ensuring the smooth transfer of family wealth from one generation to another.

Yet it is not easy for family offices to compare themselves against a standard, as no such

aggregated perspective exists on a global scale. There is, however, a clear desire among family

offices to understand better how their own organization and practices compare to those of their

peers.

Family members and professionals in SFOs participated in our study because they

recognized that by doing so they would have an opportunity to learn about a wide range of family

office structures and practices without sacrificing their anonymity or risking a commercial

solicitation

We therefore developed a research project to find out more about how SFOs are configured

and function in countries around the world, aiming to identify major trends or common structures.

Our hypothesis was that although SFOs vary according to each family¡¯s needs, some general trends

would exist. Furthermore, we believed that valuable insights were likely to result from exploring

SFO characteristics and practices across a range of cultures and political systems.

Our international pilot study took place in 2006¨C2007 and forms the basis of one of the first

comprehensive international academic studies of SFOs, conducted under the auspices of the

Wharton Global Family Alliance. We believe that this research will pave the way for more

comprehensive studies in the future as well as provide a starting point for families to compare their

family office structure and practices¡ªparticularly investment strategies¡ªto those of their peers

around the world.

We begin this chapter by first, reviewing the historical evolution of SFOs and the scant

literature about them. We go on to explain the parameters of our study, and its methodology¡ªthe 42

pilot in-person interviews, and the subsequent development of our survey instrument Finally, we

discuss some of our preliminary findings, and insights that emerge from the data we collected.

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1. The evolution of the family office

Single family offices have a long history. In ancient Rome, the major domus (head of

the house) was in charge of the treasury and servants, a role that was transformed into the

major-domo, or chief steward of a great household, by the Middle Ages. In the Frankish

kingdoms of the seventh and eighth centuries, the major-domo was often the true power behind

the throne. From the 14th to 18th centuries the term ¡°superintendent¡± was often used to

describe the person who managed the household of a rich family.

Trusts, an important tool of intergenerational wealth transfer, had their origin in the

wars and crusades of the 12th and 13th centuries. They largely evolved out of the problems of

returning English crusaders, who had entrusted someone to mind the family lands and assets

during their absence but found it hard to reclaim their property upon return. From the mid-18th

century, continental European families traditionally handed down their wealth to future

generations by way of the fideicomissum, which essentially prevented the sale or division of a

family¡¯s core assets over generations. These same benefits were granted in England and Wales

through the use of trusts.

During the Industrial Revolution, bank trust officers took on an increasingly fiduciary

role in assisting wealthy families. The family offices of the time were very basic, focusing on

serving a single-generation family and protecting its assets. As the Industrial Revolution

spawned bigger corporations, with new forms of ownership and sources of wealth, the need to

separate the management of wealth from the operating business and the family¡¯s personal and

financial affairs became evident, spawning the first separate family offices.

According to Gray (2005), the European private banking model was carried to the New

World in the 18th century by people such as John Pierpont Morgan (J. P. Morgan, 1800s) and

Stephen Girard (Bank of Stephen Girard in Philadelphia, 1812, which became part of Mellon

Financial Corporation in 1983). Private banks, which grew out of the goldsmith banks,

eventually partnered trust companies to provide a wider range of services for the affluent.

Successful entrepreneurs found themselves at the helm of big corporations, running

ever-expanding businesses or starting new ones, investing in other companies and diversifying

their holdings. Families such as the Rockefellers, Carnegies, Fords, Vanderbilts, Roosevelts,

and Morgans built up such large fortunes that they faced the dual demand of managing both

their businesses and their huge asset pools (Gray 2005). The responsibility for wealth

management was increasingly borne by the family¡¯s business staff, not all of whom were

family members. In 1838, the Morgan family created the House of Morgan to manage family

patrimony issues. The House of Morgan gave rise to one of the first modern family offices, a

model then also applied by Guggenheim, Dupont and Vanderbilt families.

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2. Prior SFO research

Literature on the modern family office is scarce, and there is even less on SFOs. Part of

the reason is that wealthy families want privacy. Another hurdle is that, depending on how it is

defined, ¡°family office¡± can cover a multitude of office structures, ranging from one family

member doing administrative tasks for his or her family alongside other tasks in a family

business, to a team of professionals focused on investment, accounting, legal affairs, and

concierge services (Avery 2004; Martiros & Millay 2006).

Indeed, the various definitions proposed by practitioners include: an organization to

support a specific family¡¯s financial needs (from strategic asset allocation to record keeping

and reporting) (Wolosky 2002); a center of influence and stability to help exceptionally

wealthy families ensure the preservation and growth of their financial assets and family

heritage (Avery 2004); and a structure created to manage the assets of a wealthy family (Curtis

2001). Private Banks that offer Family Office services also handle the management of the

assorted financial and operating affairs of a family fortune, including providing financial

expertise, privacy, and the integration of family¡¯s wealth and operations, serving as a

clearinghouse for investment and accounting services, assisting with philanthropic endeavors,

and offering additional educational and advisory programs.

Based on its comprehensiveness and simplicity, we adopted the following definition of

an SFO: ¡°a professional center dedicated to serving the financial and personal needs of an

affluent family¡± (Amit 2006). An SFO could also take the form of a trust or any other legal

structure.

As mentioned earlier, a common scenario is when a family business is so successful

that it presents a dual challenge: the continuing management of the business itself and that of

the fortune that the family has amassed. Many such families resort to specialized help in

managing their assets, typically in accounting and record keeping (Wolosky 2002). This need

for outside assistance is usually accentuated by the sale of the family business and the sudden

liquidation of an immense amount of wealth (Avery 2004). Second and subsequent

generations, who inherit large fortunes or acquire them suddenly through the sale of a family

business, often lack the time and expertise to manage their vast wealth wisely.

It¡¯s easy to see why such families need help, but why turn to a family office rather than

another wealth optimization service? Curtis (2001) quotes a family office manager in

addressing this: ¡°The most fundamental reason has to do with the challenge of stewardship: no

one will take your issues as seriously as you will take them yourself.¡± Indeed, previous studies

suggest that individualized service, confidentiality, control and flexibility are among the key

benefits cited by families who have family offices (Avery 2004).

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Family offices are reckoned to provide more customized solutions, confidentiality, and

greater involvement and commitment than other alternatives. They are also more trusted to

handle issues that the family wants kept away from the public eye. The family office is

typically treated almost as part of the family (Avery 2004; Newton 2002) and seen as the best

means of preserving trans-generational wealth (Avery 2004). Other key factors are privacy, the

absence of conflicting interests (such as those due to primary versus secondary clients¡¯ issues),

flexible structure, exclusivity, and discretion (Allen 2007).

The literature also reveals some interesting differences in priorities. For example,

increased control is one of the top reasons cited by families for using an SFO or multi family

office (MFO)¡ªa commercial enterprise serving several families. Yet ask the manager of a

commercial family office what his or her top priority is and control is not even on the radar¡ª

profit generation is the most commonly cited prime pursuit. In contrast, profit generation was

not even mentioned when SFO managers were surveyed on their key objectives (Shaw Grove

& Prince 2004). In a similar vein, increasing the happiness and enhancing the lifestyle of

family members, and providing family leadership by preparing the next generation for their

responsibilities, are valid and important, though non-commercial, criteria for success in an SFO

context (Gray 2004).

These different priorities and motivations are worth bearing in mind as they also affect

decisions about services provided, recruitment criteria (both for in-house and outsourced

personnel), governance mechanisms, performance measurement, and future vision for the

family office market.

Finally, amid the increasing number of family offices and hybrid forms, there is also

more demand for elite wealth management professionals to work in SFOs. Family offices often

appeal to such professionals for lifestyle reasons, not just remuneration and career

advancement (Avery 2004). Several articles cover the qualities needed to work in an SFO,

including a liking for detail and dealing with family dynamics, and more than one area of

expertise (Wolosky 2002). These qualities should be combined with the ability to handle multigenerational complexities, numerous entities, the unique goals of each family member, and the

inevitable emotional issues (Bowen 2004).

The literature reflects this diversity. Most articles cover various alternatives for the

management of great wealth, among them different types of family office service providers,

rather than focusing on one specific type (Newton 2002; Shaw Grove & Prince 2004; Gray

2005; Avery 2004; Wolosky 2002; Gray 2004). It is also worth mentioning here that in recent

years small companies that specialize in one service have been acquired by bigger companies

that want to provide a full range of services to families. One example of these is concierge

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